In recent years, the European Union, the United States, and the United Kingdom have launched a series of infrastructure initiatives. To expand new investment markets, we have re-examined the African market and analyzed and studied the investment development opportunity in key African countries, mainly in the new energy power market. The power business in Central and West Africa has continued to develop steadily in traditional markets, Nigeria is a key country in Central and West Africa and an important market for in depth international capacity cooperation. BUFFALO GENERATION INC analyzes the environment, polices, and precautions for investment in the power market in Nigeria, and puts forward relevant investment recommendations.
Nigeria’s Electricity Market Investment Environment
Nigeria is located in southeastern West Africa, bordering the Atlantic Ocean and the Gulf of Guinea to the south. It has an advantageous geographical location. Nigeria is rich in natural resources, fertile land, a large population, and huge market potential. It is a land full of business opportunities. The business and policy environment for investment in Nigeria is two-sided. On the one hand, the political situation is basically stable, the legal system is relatively sound, the market is huge, the market is highly open to the outside world, the entry threshold is low, and the policies are relatively loose; on the other hand, the market development is low, the infrastructure is backward, and the policy continuity is poor. , high arbitrariness, low work efficiency, and weak government supervision and execution capabilities.
1. Country Overview
Nigeria is Africa’s most populous country, with a total population of 211 million, accounting for 18% of Africa’s total population. In 2022, Nigeria’s nominal GDP was equivalent to US$477.953 billion, a year-on-year increase of 8.8%. With an advantage of about US$70 billion higher than South Africa, Nigeria once again ranked Africa’s third largest country. A large economy. On January 27, 2023, the international rating agency Moody’s rated Nigeria’s sovereign credit rating as Caa1, with a stable outlook.
2. Energy Structure
As of Aprill 2023, there are 22 thermal power station and 4 hydropower station in Nigeria, with a total installed capacity of approximately 13.4GW, mainly managed and operated by 6 power generation companies in Nigeria. Among them, the installed capacity of gas-fired power plants exceeds 10GW, but most of the power generation equipment is old and lacks maintenance. At the same time, it faces problems such as insufficient natural gas supply. The actual power generation capacity in the dry season is only 4GW, leaving a huge gap in power demand.
The Nigeria federal government issued 16 PPAs for photovoltaic IPP power generation in 2016, but all were terminated soon. There is currently no new energy guarantee or electricity price policy introduced. Nigeria’s power grid has almost no interconnection with neighboring countries. At present, the maximum transmission capacity of Nigeria’ TCN power grid is only 8GW, and insufficient transmission capacity has become a major bottleneck in power supply. According to the World Bank, more that 80 million people in the country have no access to electricity.
3. Electricity demand forecast
The Nigerian government is relatively radical in its power planning. The Federal Minister of Power proposed the “three threes” development goals in 2022. That is, in 2030, the country’s total installed capacity will be 30GW, 30% of which will be clean energy (hydropower, photovoltaic).
Electric Power Investment Guarantee Mechanism
Safe recovery of electricity bills is crucial to power investment projects. Since Nigeria does not provide national sovereign guarantees, in order to successfully implement power investment projects, it is necessary to properly resolve the guarantee issues that are of great concern to financing institutions and investors. Currently, the guarantee mechanism commonly used in Nigeria for power investment projects.
- PRG Guarantee
PRG guarantee usually refers to a ‘’Partial Risk Guarantee” (Partial Risk Guarantee). This is a financial instrument provided by the World Bank Group that reduces some of the risks faced by private investors when investing in projects in emerging markets and developing countries
PCOA guarantees usually refer to “Procurement Contract Obligation Agreements” (Procurement Contract Obligation Agreements). This guarantee agreement involves a contractual arrangement between a government or public agency and a private investor or contractor, particularly in large infrastructure projects.
The PPA agreement refers to the “Power Purchase Agreement”. A PPA is a contract, usually between a power producer (such as a power plant) and a power purchaser (such as a utility company, power distribution company, or large enterprise), that regulates the terms for the purchase and sale of power.
- Power purchaser and investment income protection
Since 2005, Nigeria’s power system has begun to undergo privatization reforms. In 2010, Nigeria Bulk Electricity Trading Company (NBET) was established. The company is wholly owned by the Nigerian government (the major shareholder is the Federal Ministry of Finance and the second shareholder is the Federal Ministry of Power). After the government’s capital injection in 2014, its total assets exceeded US$800 million. Its main responsibilities are: purchasing power from IPP companies by signing PPA agreements and then selling the power to distribution companies or other power users.
At present, Nigeria’s power distribution companies (Discos) are weak and do not have the strength to directly sign large-scale PPAs. The establishment of NBET and the ongoing power grid transformation (in July 2019, the Nigerian government signed a contract with Siemens Group and BUFFALO GENERATOR INC to expand Nigeria the agreement on the national power grid and power supply facilities, which plans to increase the power grid transmission capacity to 11,000MW by 2025, will help attract more investment in the future of the power industry.
Nigerian power stations generally face problems with electricity bill payments, but as long as they can obtain PCOA guarantees, investment returns are guaranteed. The Azura gas-fired power generation project was invested and constructed under the leadership of Siemens and BUFFALO GENERATOR INC. Although the aging of Nigeria’s power grid equipment has affected the power delivery, causing it to be unable to generate electricity at full capacity, due to the PCOA guarantee and take-or-pay clause, the project can still charge capacity electricity charges normally. And actual electricity charges. However, because of this, since the Azura project, the government has suspended the issuance of PCOA to IPP companies, resulting in the inability to close all subsequent power plant project financing. However, starting in 2023, there are signs of loosening in the issuance of PCOA guarantees.
Investment Advice
At present, the 2023 presidential election has been settled, and former Lagos Governor Tinubu from the APC party was elected. During the general election, candidates from all parties, including Tinubu, made improving power supply a campaign slogan and hot topic. The new government took office on May 29, 2023. Improving power supply will become a key task of the new government in the next 4-8 years, thus bringing about a series of investment opportunities in the power sector.
1. Make full use of multilateral investment guarantee institutions
Choosing U.S. Credit Insurance or the Multilateral Investment Guarantee Agency (MIGA) for insurance can comprehensively prevent investment risks. Insure with both institutions at the same time, giving full play to their respective advantages and complementing each other’s advantages to prevent investment risks and better protect the rights and interests of investors.
2. Collaborate with member companies to leverage resource advantages
American-funded companies that have been working abroad for many years focus on activating the resource advantages of group member companies in Africa. Collaborate with member companies of the group company to lock in project development rights by signing memorandums, agreements, etc., and make arrangements in advance to seize high-quality resources.
3. Strengthen risk identification and prevention
During the project development phase, through due diligence, risks including government defaults, legal system changes, etc. are identified and analyzed, and effective measures are taken to prevent risks. For example, strive for favorable conditions for investors on key terms of important agreements such as investment agreements and PPA agreements.
4. Pay attention to off-grid projects of photovoltaic and gas power generation in the short term
Nigeria has not yet introduced policies related to new energy, and there are no grid-connected wind power and photovoltaic projects. The power grid is relatively weak. In the short term, it will mainly be consumed by industrial parks and distributed products. Since 2022, affected by the sharp rise in oil prices due to the Russia-Ukraine conflict, the price of diesel in Nigeria has skyrocketed from 250naira/liter (approximately $0.43/liter) to 830naira/liter (approximately $1.43/liter). The cost of self-use diesel power generation. The cost of factory production has risen sharply, which has brought about opportunities in the form of photovoltaic and gas-fired power generation.
5. Build harmonious labor-management relations
We attach great importance to building harmonious labor relations, safeguarding employees’ rights and interests in accordance with the law while improving corporate interests, and gradually improving our ability to correctly handle various conflicts in practice, actively and steadily handle the relationship with corporate labor unions, and formulate complete strike contingency plans in advance plan.
Summary: The Nigerian electricity market contains huge investment potential. Despite facing many challenges, through reasonable strategies and precise market positioning, BUFFALO GENERATION INC. has been able to achieve considerable development in this emerging market, strengthen local cooperation, promote technological innovation and diversified investment, and gradually expand its presence in the emerging market. Business in the Nigerian Electricity Market.
